Microsoft's Ballmer: Surface a 'tougher' bet than the Xbox

Microsoft's Ballmer: Surface a 'tougher' bet than the Xbox

Summary: Microsoft CEO Steve Ballmer talks turkey about Microsoft's reasons for getting into the first-party hardware business, and why he thinks the company must remain a device maker.

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"Nobody ever buys Windows. They buy Windows PCs."

ballmersurface

Many Microsoft customers, partners and competitors would no doubt agree with this statement. But many also might be surprised to hear this admission comes from Microsoft CEO Steve Ballmer.

When I interviewed Ballmer at the end of November, 2013, in his office in Redmond, a lot of our conversation focused around his role in overseeing Microsoft's software and services, past and present.

But Microsoft is in the hardware business, too, with Xbox, Surface, Windows Phone and Perceptive Pixel (plus mice and keyboards). Its executives, from Ballmer on down, are increasingly playing up the reasons they believe Microsoft needs to stay in hardware to remain relevant -- in the face of calls by some company watchers for Microsoft to split off its Xbox and/or its consumer-hardware business.

"One of the things tech companies really do terribly is build new capability," Ballmer told me during our recent sit-down in Building 34. "Unfortunately, when the industry changes, if you haven't built any new capability, you can become less relevant because the thing you were good at becomes less relevant and you didn't built capability in a new area."

"We've had to do it a couple of times, in fact, from platforms to apps, from now software to services, from OS (operating system) royalties, to OS royalties and devices," he said.

Ballmer called Xbox  -- in which he played an instrumental role in shepherding -- a "sort of a signature about building new capability in hardware and devices." Because of the Xbox, Microsoft had to build a custom-silicon team. Microsoft had to staff up a supply-chain team. And because of the existence of this body of knowledge, Microsoft was able to make the decision to get into device-manufacturing with its Surface tablet/PC line, Ballmer said.

Microsoft's first-generation Surface devices got mixed marks. The Redmondians ended up having to write down nearly $1 billion worth of Surface RT devices and component parts in 2013.

"We still need to upgrade and we still need to upgrade and improve, and that's part of the Nokia acquisition," Ballmer conceded.

Microsoft will be adding 30,000 or so Nokia employees, many of whom will bring with them hardware manufacturing and distribution know-how, as part of its $7.2 billion purchase of Nokia's mobile devices and services business. (Ballmer noted that he was unable to talk specifically about Nokia because Microsoft's purchase still has yet to close. That's expected to happen by early 2014.)

Ballmer: 'We had areas of vulnerability in competing with Apple'

Ballmer characterized Microsoft's initial decision to build first-party tablets as "in a way... a tougher bet" than the decision to build the Xbox.

Surface "was less different (than Xbox), you could say," Ballmer noted. "But, I also knew that it would not be the simplest discussion to have with our partners, who(m) I wanted to stay our partners."

As expected, Microsoft's OEMs, some of whom said publicly they felt blind-sided by Microsoft's decision to make its own devices, were none too happy about the move. But Ballmer insisted Microsoft had no choice.

 "I was concerned that we had areas of vulnerability in competing with Apple and without any (first-party) capability, that we were not transacting that well just through our OEM partners."

Ballmer said management's area of concern was in the high end of the device market.

"High end was an issue. There were just a lot of reasons to think Apple was going to be a tough competitor to deal with, just with our OEM model. It was a higher-end brand," Ballmer acknowledged.

"Our OEMs were having a hard time investing in competing with the higher end brand. The (Microsoft retail) stores were (starting) to take off, but they hadn't taken off. It turns out that was also an issue, because now there's a different kind of a presence. And without a product to fit -- a product, a brand, a price point -- to really go head-to-head, it looked like an area of exposure," he continued.

"So I won't say we said 'Let's go do Apple compete.' We wanted to go do our own thing that was uniquely ours," he said.

Ballmer said Microsoft didn't set out to build a "classic 13-inch laptop or a $500 desktop." In those categories, "our OEMs do a great job," he maintained.

"On the other hand, there was an area of vulnerability," Ballmer said. "The vulnerability we have is not just on phones, where we're buying Nokia, but it's on tablets. And our OEMs do great work, but there are places their brands and investments don't travel. And so we wanted to supplement the work of our OEMs, hopefully make our OEMs stronger through the process, by making our overall competition with Apple" -- and more recently -- Samsung.

Ballmer portrayed Microsoft's differentiator with its tablets and phones as "tools," specifically "tools that make people more productive, IT people, developers, and end users." (Given Microsoft's heritage as a development-tool maker, "tools" is an interesting word choice.)

"Are we a productivity company or are we a software company? Well, what we are is a company that knows how to create great software for productivity and serious fun, but the expression will be through services, and through devices increasingly. And maybe it always has been. Nobody ever buys Windows. They buy Windows PCs," Ballmer reflected.

"There's no question Windows defined a class of a device. The problem is in new classes of devices, it's hard to get leverage simply through the OEM model -- whether it's phones or tablets -- and so we're doing more first-party hardware than we used to. But we're trying to express our creativity writing software, particularly software that helps people be productive, communicate, and have serious fun."

Topics: Steve Ballmer: The Exit Interview, Microsoft, Nokia, Tablets, PCs, Windows 8, Windows Phone

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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138 comments
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  • Surface is a catalyst

    The ball is rolling now, Vendors are starting to produce some great HW designs and hybrid devices. Shame they needed a kick from Microsoft to get moving.
    Sean Foley
    • M$ black Friday sales disapointed, holiday sales down

      So the next time you go by the M$ store, if by the M$ store you go.
      Wipe away a tear
      for the crowd that's not there
      And whisper a silent 'Ho, Ho'
      FrankInKy
      • Who is lying?

        According the following article, you are either being wrongly used to be the propagator of false news or a compulsive layer:

        http://news.yahoo.com/extremely-popular-surface-pro-2-surface-2-sold-142031329.html

        I leave with you to choose into which category you belong: liar or slave of false news!!!
        Wonder.man
        • Depends on Stock

          Sold out is only meaningful if we have an idea of how many they built. After one of the biggest tech failures of all time (1st gen Surface) it's reasonable to assume that stock was far, far, lower than last year.
          rbgaynor
          • Surface = Kin. It has already failed

            Sales disaster.

            Windows RT (inside the Surface) will soon get the axe. Users will be on a diserted platform. Surface is the new Kin, and we know what happened to Kin.

            Bye bye Ballmer. You blew it again!
            Vbitrate
          • Surface RT is having problems

            Surface that runs Windows 8 is doing pretty darn well all things considered.
            Lerianis10
          • I don't know ... every place I look, the first generation Surface RT ...

            ... and Surface Pro is SOLD-OUT and most models of the Surface 2/Pro 2 are SOLD-OUT too!
            M Wagner
          • Ummm...

            ...just because you don't see any Surface tablets at the store and the salesman says "we're not stocking anymore of those" doesn't mean they're sold out.
            FrankInKy
          • So, everyone agrees Surface is dead

            Well, everyone agrees Windows RT is dead as a dodo.

            Therefore, the product called 'Surface' is as dead as a dodo.

            Now, if you want to jam the full bloated desktop Windows OS into a thick and heavy heat-belching tablet (Surface Pro) then go right ahead.

            But everyone now agrees that Microsoft's dedicated tablet OS and Surface is as dead as a dodo. The next CEO will have to cancel the Surface.
            Vbitrate
          • r u serious?

            Your comments blow me away! Do you really feel your assessments are factual? Or, do you just like to talk trash?
            GrahamJenkings
          • He's serious

            It was just a couple weeks ago a Microsoft big wig (female), Larson-Green perhaps, said that Microsoft wasn't going to continue supporting 3 operating systems, so of the 3, the Windows RT operating looks like the one most likely to be discontinued. Microsoft should discontinue all of their OSs and switch to the Linux kernel, but they're too hard headed and arrogant. Piss on their customers, just screw them out of money. That's Microsoft.
            StevenAbaby
          • so ...

            How likely is it that Microsoft will just outright dump Windows running on ARM (which is what WindowsRT is).

            Now, how likely is it that Microsoft will continue its consolidation and merge some of Windows Phone and Windows to provide a more consistent API and user experience that can scale from 4" devices like phones through 7-8" mini tablets through 11-12" tablets and beyond, resulting in less differentiated code between Windows Phone and Windows and, possibly, fewer SKU's?

            The latter is FAR more likely.
            bitcrazed
          • No they don't...

            The same people saying Microsoft is going to ditch RT are the same people saying that Google is going to ditch Android.
            slickjim
          • No dope...

            They're sold out because people went looking to buy them and they were sold out!

            We went looking for two while the sales were going on and had to drive all over our city where we finally found the last two Tiger Direct had in stock!

            The original surface also was the #1 selling item at Best Buy during the Black Friday Weekend, where it sold out.
            slickjim
          • Meaningless

            If you make a 100 units selling out is not hard. After the massive write off for the Surface RT failure you can bet MS ordered far fewer units of the Pro so in this situation sold out is all but meaningless in terms of adoption.

            I have yet to see a Pro in the wild.
            KBabcock75
          • they have a better feel for numbers which will be sold.

            Now they know how many can be sold --- making fewer units. No news here, so move along.
            mytake4this
          • unless

            Unless a misfortune update bricks it. Neat looking bit of hardware. There is work to done however. More good apps-- less bad updates, would help matters.

            Looks more like Win8.1 is selling and thus still the need for antivirus and legacy software ... oh well.
            mytake4this
          • Just stop...

            Just stop perpetuating that myth. Data Centers getting ARM Processors means that RT turns into a full fledged OS and doesn't disappear.

            Qualcom is said to be going after a 64-bit ARM Based Server CPU. If this actually happens, RT is a good start on a full blown ARM based system.
            slickjim
          • Not RT as we know it, it doesn't

            This would be a more full fledged Dave Cutler style portable Windows NT of the kind Microsoft had in the 90s on Alpha and MIPs. The RT of today wouldn't cut it; this would have to be a full powered Windows 2012 Server running on ARM, worlds away from the current Windows RT.
            Mac_PC_FenceSitter
          • Mac PC FenceSitter

            As the owner of a Surface, the difference between RT and Windows 8.1 aren't very noticeable and to make claims like that are bunk...

            This OS might not have any of the server pieces but, it is a good foundation for the ARM platform.

            I told you guys several years ago Android would be king of Tablets and Phones... I was one of the first on this site to say it and everyone doubted it... Now look at where we are with Android owning the Phone Market and very close to taking the Tablet over.

            So, I'm telling you, RTs existance depends heavily on which way the Market goes with processors in the data center and desktops. Thin Clients already have a lot of ARM based processors and there's a lot of those going in as more and more things are virtualized.
            slickjim